In a phase of low interest rates and a slowdown in the growth rate of Western developed economies, authors such as Lawrence Summers and Jason Furman believe it is possible to reach some conclusions.
The first has to do with the fact that fiscal policies are, nowadays, essential for maximizing employment levels and maintaining sustainable growth.
The second is related to the fact that the reduction in interest rates implies new measures in the budgetary field and, therefore, with regard to the nominal convergence criteria themselves (including, within the framework of EMU).
In fact, in 1992, when the celebration of the Maastricht Treatya limit of 60% was established for the DP/GDP ratio, given that, at that time, long-term German Treasury Bonds had a nominal interest rate of 7.8% (and a real interest rate of 5%).
In 2019, the nominal interest rate on the same bonds became, in real terms, -2%. With an interest rate of 7.8%, the financial burden for a public debt of 60% of GDP reached around 4.2% of GDP.
However, Japan, currently with a ratio of around 250% DP/GDP, spends a small percentage of GDP on financial charges with Public Debt.
From what has been said, it can be concluded that the DP/GDP rule is, to a large extent, inadequate because it equalizes the fact that debt can be repaid at different “speeds” over time, and it should also be noted that, in a “low” phase of interest rates, it is a concept more focused on the past than the future.
The third fundamental conclusion we can reach is that there will tend to be an eventual greater need to expand public investment.
As Summers states – and rightly so –, it is not necessarily because deficits in the present increase that future generations will be poorer.
Everything depends on the comparison between the economic and social profitability of public investment and the interest rate on the debt contracted.
The author exemplifies with the investment in training young people, explaining that this investment is reimbursable in 20 years, thanks to the increase in salaries earned by students, therefore reverting to the State additional tax revenues that, in the long term, more than compensate for the investment made.
In short, the objective of fiscal policy should be to promote growth and financial stability, including the indispensability of avoiding recessions and, on the contrary, opening the way to more intense (and qualitatively superior) long-term development.
Therefore, new budgetary policy objectives should be considered, namely:
– the financial burden on public debt should not exceed 2% of GDP;
– the GDP growth rate should be higher than the interest rates on long-term public debt;
– the Financial Charges on Public Debt/GDP ratio should be stable over a 10-year period.
From what has been said, it can be concluded that, although investments in infrastructure are relevant, it is also important to prioritize the financing of permanent training programs for young people, promoting, at the same time, the restructuring of Public Administration.
It is also concluded that low interest rates should invite the implementation of expansionary budgetary policies, as long as they are compatible with sustainable debts.
No more, no less…
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